Of airlines, motorcycles and the markets

HerbGreenberg

SAN DIEGO (MarketWatch) -- What could analysts be thinking on AMR, parent of American Airlines?

Average analyst estimates for earnings next year are 48 cents per share, or a profit of around $80 million. But based on the guidance AMR
AMR, +27.78%
gave for fuel costs, inflationary expenses, revenue initiatives and cost savings - the closest the airline gets to giving a forecast -- it appears this year's operating loss could be more than $100 million greater than last year's reported loss. How does that result in a profit? Answer: Unless oil prices collapse, it doesn't, which is why its stock is flying (he said, sarcastically) - a theme, you'll soon discover, of today's sermon.

And while we're on irrational stocks: Harley Davidson
HDI, -0.96%
has, for more years than I can recall, left tire marks on anybody who dared be anything but bullish on its prospects. (Present company included.)

But those critical of Harley are a hearty bunch.

Among them, hedge fund manager John Succo, writing on Minyanville.com, notes that dealer inventories continued to swell as the resale prices on used bikes continued to fall, "which puts a great deal of pressure on the prices of the new ones," he says.

Yet beating estimates, he adds, "caused the earnings surprise guys" to buy, which drove the stock a few points higher. Of course, it doesn't matter how the company beat those numbers, which were puffed up by stock repurchases the company itself says helped earnings per share rise faster than sales - hardly what you'd call a high quality beat.

But since when did quality matter? Not in this market -- that's when! Oh, and by the way, delinquencies on the credit side of the company's business are on the rise. One day, with Harley, all of that may actually matter.

More market mania: I go out of my way not to write about the overall market. I don't know any more or less than the average guy in the gutter or the average strategist on the street.

But one thing I'm good with (if I don't say so myself) is inflection points.

I can say, unequivocally, we're at one now. There is always an inflection point, for example, when I start hearing neophyte investors say that they're hanging onto every word I write - and that they are "making money" by shorting stocks merely because they show up in this column with some kind of cautionary statement. That usually means stocks have fallen too quickly, in which case the spring is ready to be sprung on the upside.

The other inflection point, which we're at right now, is when stocks I red-flag either here or on TV wind up going higher just because I mention them. At the same time, at this inflection point, bearish sources clam up, I start thinking maybe I ought to throw in the towel and become a coffee barista (how does "Herb's Hut" sound?) and investors start thinking they're geniuses as stocks of companies with questionable fundamentals fly for no apparent reason other than they're going up.

But just remember: In the past, whenever this has happened - and I've lived through quite a few episodes-- it has been only a matter of time before the market hits one of those unexpected and unpleasant air pockets that remind people that the reality of potential risks should be respected and that hubris (about how easy it is to make money in some of these stocks) can be horribly humbling.

Further signs of ridiculous speculation On Thursday I wrote a piece in my subscription newsletter, Herb Greenberg's RealityCheck, about Novastar
NFI, -1.36%
I've been writing negatively about the subprime mortgage lender for more than three years. This time I noted how someone smart, who has been publicly bearish, turned temporarily bullish.

Within a minute of the alert hitting subscriber mailboxes the stock started to zoom higher. Shortly thereafter, blurbs hit rumor wires that "Herb Greenberg" had turned "positive" on Novastar. No, what Herb Greenberg (otherwise known as I) did was report the conversion of a bear to a short-term bull, how he thinks his prior theory and that of current bears is "flawed" and how the current bears think his argument is equally "flawed." I also pointed out how the short-term bull agrees with the perma-bears that as credit risks take hold, Novastar's stock is headed considerably lower than it is today. (Which is why it remains red-flagged on the RealityCheck watch list.)

Sudden thought: A year ago American Italian Pasta
PLB, +0.47%
was around $26 headed to an April intraday high of close to $30. Today it's closer to $6. A few years ago, Taser
TASR
was around $31, post a few splits, on its way to a low later in the year of around $5. And remember Movie Gallery
MOVI
as it peaked mid-year at around $27 after more-than doubling in a matter of months? Today it's under $6.

You just might want to keep those three in mind next time you find yourself smug about a stock whose rise appears to be too good to be true. The trouble with parabolic rises is that what goes up fast has a way of falling even faster.

All of which is a long-winded way of saying: Fasten those seatbelts and never mind the air sick bags; they'll be of no use.

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